What is a partnership firm?
A partnership firm is a business entity where more than one person comes together to start a business under one name. Each person is called a ‘Partner,’ and collectively, all partners are called as a ‘Firm.’ A partnership firm can be a registered or unregistered partnership firm. Registering a partnership firm with the registrar of a firm is an option and not a mandate.
A partnership firm is suitable for small businesses, is easy to form, and has minimum requirements of regularities.
A partnership firm can be registered even after the formation, and there are no penalties for non-registering the firm. However, unregistered partnership firms do not have certain rights u/s 69 of the partnership act, which mainly deals with the consequence of not registering a partnership firm. The Income Tax Act defines a partnership firm as “a group of persons who have agreed to share the profit and loss of a business moving on by all or any of them acting for all.” i.e., 1 firm that is not registered with the registrar of firm is an unregistered partnership firm.
How is a partnership firm treated under the Income Tax Act?
According to the Income Tax Act 1961, a partnership firm has to pay different tax rates depending on the firm's income and other factors.
Tax percentage applied to Partnership firms as follows:
- Income tax at 30% on taxable income
- Surcharge at 12% if the taxable income exceeds ₹ 1 crore
- The interest of capital up to 12% is allowed as a deduction
- Education and Health cess at 4% of the tax plus surcharge
Unlike sole proprietorships, a partnership firm is a separate legal entity from its partners. This means the firm has to pay tax on its own income, regardless of whether it is registered or not. A partnership firm must also pay an alternate minimum tax of 18.5% of the adjusted total income
What are the deductions allowed for partnership firms?
Taxpayers must pay attention to the deduction allowed before calculating the Income tax amount that has to be paid. Claiming for a deduction may reduce your Income tax liability.
Expenses that are eligible for deduction:
- Salaries, bonuses, commissions, or any other remuneration paid to the non-working partners of the firm.
- Payments made to the partners that are not following the partnership deed
- Payments made to the partners related to any transaction before the partnership deed was executed.
How to file tax returns for partnership firms?
The Form ITR-5 is applicable for filing income tax returns by entities such as firms, LLPs, AOPs, BOIs, AJPs, business trusts, investment funds, cooperative societies, and local authorities. This form is not for individuals, HUFs, companies, or trusts eligible to file ITR-7. Form ITR-5 can be filed online through the income tax e-portal. This form is used for filing ITR for partnership firms and not for individual partners.
The Form ITR-5 does not require any attachments of supporting documents it. However, these documents may have to be submitted to the Income Tax Department if requested.
The Form ITR-5 must be filed electronically with or without a digital signature or Electronic Verification Code. However, if the entity is subject to audit under any section of the Income Tax Act, 1961, it must file Form ITR-5 with a digital signature and e-file the audit report. The entity's partners must also have a class 3 digital signature to verify the filing process.
What is the due date for partnership tax filing?
The due date for filing an income tax return for a partnership firm varies depending on whether the firm needs an audit. The filing dates of the income tax return are as follows:
- For firms that do not need an audit – the income tax returns should be filed by 31st July.
- For firms that needs an audit – the income tax returns should be filed by the 31st of October.
Trusted by 1 Million+ Users
4.9 Star User Rating
2500 Cr. Taxes Saved Already
